LOSS ON TRANSFER OF LONG-TERM SHARES AND UNITS can be set off against other capital gains, even if ‘profit’ or ‘gain’ would be exempt if transaction of transfer has suffered security transaction tax

LOSS ON TRANSFER OF LONG-TERM SHARES AND UNITS can be set off against other capital gains, even if ‘profit’ or ‘gain’ would be exempt if transaction of transfer has suffered security transaction tax - Income Tax - Direct Tax Code - DTC - By: - CA DEV KUMAR KOTHARI - Dated:- 20-6-2015 - Summary: On an analysis of the old and new provisions it is noticed that the shares in companies, units of mutual funds, other assets which are held as investment and are not treated or converted into stock-in-tra .....

view that loss under head capital gains suffered on transfer of such assets will be eligible for setoff and carry forward, even if, gain if any, in the same circumstances would be exempt because tax has been imposed in some other manner or scheme for collection of tax in security transactions. In view of author, and according to explanations from CBDT on introduction of STT, it can be said that STT is a tax in lieu of income-tax, and STT is levied with a view to simplify taxation of income in ca .....

issued by the Unit Trust of India under the Unit Scheme, 1964 referred to in Schedule I to the Unit Trust Of India (Transfer of Undertaking and Repeal) Act, 2002 and units issued by other mutual funds also which enjoy similar exemption. Such units are capital asset within the meaning of the tern capital asset as defined in section 2(14) of the Income-tax, Act, 1961 ( the Act). Similar is case for shares held in companies or co-operative societies etc. The unit, shares etc. have not been excluded .....

apital gains is required to be made. In case the unit is a long-term capital asset, then benefit of indexation as per proviso to section 48 with reference to relevant cost inflation index in the year of acquisition and the year of transfer is also required to be made. The computation shall be as per prescribed provisions and the A.O. can ask details of such computation and supporting documents to establish factual and legal position. 3. Section 10 (33)/ 10(38): By the Finance Act, 2003 a new cla .....

referred to in Schedule I to the Unit Trust Of India (Transfer of Undertakings and Repeal) Act, 2002 (58 of 2002) and where the transfer of such asset takes place on or after the 1st day of April, 2002. Likewise S.10(38) relates to exemption of LTC gain on transfer of shares and units when the sale transaction is in specified circumstances and has been subject matter of payment of security transaction tax. An analysis would show that: 1. Only capital gain has been exempted. Thus, business profit .....

e purpose is to give a benefit of tax exemption and not to deny the benefit of set off of loss which was earlier available. The exemption is not allowed in case conditions are not met. The empirical studies shows that in most of the cases the investors who held units for long time and particularly who have purchased units at higher price suffered heavy losses due to sale / redemption price being lower than the cost and inflated cost as per inflation Index. Considering the purpose of insertion of .....

ng benefit of set off and carry forward and set off of loss arising from such units and shares even if conditions for exemption are met. In this regard it is also important to notice that security transaction tax has been levied, as a measure to simplify taxation on income arising from transactions in securities. The exemption is allowed only if STT is levied on transaction in securities. If the transaction is out of purview of levy of STT, then such exemption is not allowed. Taxing income by wa .....

shareholders, in such circumstances should not be taken as a tool to deny allowability of expenditure incurred by shareholders for making investment, holding and carrying investments. However, unfortunately, the revenue authorities are taking stand and disallowing expenses. 4. The expression any income arising from transfer : The above expression is very important for the purpose of this write-up. The expression any income arising in the context of exemption from taxation can mean only profit or .....

also it is clear that what is to be excluded from inclusion in total income is certain incomes specified in the chapter. The items are in nature of receipts of money, profits, and gains generally covering positive figures. The exemption is only for positive figures, for negative figures no exemption is required. 5. The words income and loss are opposites: 1. The words income and loss are opposite words. The expressions like, profit gains etc have been defined in dictionaries just to mean some po .....

gains, profits, salary, wages, etc. Income - section 2 (24) of the Income-tax Act, 1961 clearly shows that income includes only positive incomes arising in form of some receipts or profits or gains computed as per relevant provisions of the Act. None of the clauses can, by any stretch of imagination suggests that income includes loss. Therefore, when we speak of income, and particularly chargeable income, we can envisage only a positive income and not a loss as a negative income. The concept in .....

not to an item which is not at all capital asset, then it is applicable to any income arising from transfer of such capital asset. In case the cost of acquisition or the indexed cost of acquisition of Unit is more than the consideration accruing on sale or transfer, then there is no case of income arising so section 10(33) will not apply. 7. The principle decided by the Supreme Court and statutory provision: It was decided by the Supreme Court that for computing gross total income and total inc .....

rovisions corresponding to section 64 of the 1961 Act) the term income shall include loss. It was not ruled that for all purposes income include loss. Now the principle has found statutory recognition by way of insertion of an explanation to section 64 of the Income-tax Act, 1961 as follows: Explanation 2: For the purpose of this section, income includes loss. Thus, it is clear that the principle that income includes loss is limited in its application to section 64 only. This principle cannot be .....

8377; 35 because the income is negative ₹ 100 so tax will also be negative ₹ 35 - a lottery indeed for loss maker. Or Tax loss of Rs. (100) the same way as profit of ₹ 100 say ₹ 35 as income tax and increase after tax loss of assessee to ₹ 135/-. Let us take other case an individual has suffered loss of Rs one lakh, he is not required to file return of income, he can do so if he wants that the loss should be carried forward. If the loss of Rs. one lakh is called to .....

ssessee sought to carry forward loss under the head capital gains for the assessment year 1955-56. In that year, any income falling under the head capital gains was not at all taxable, even in subsequent year any income falling under the head capital gains were not taxable under the old provision of Income-tax Act, 1922. In that case the rational and reasoning was that there must be purpose of computing the loss (under the head capital gains). The purpose can be to set off the loss or carry forw .....

sole purpose is to set off the loss against the profits (of the year) or of a subsequent year. It presupposes the permissibility and possibility of the carried forward loss being absorbed or set off against the profits or gains, if any of the subsequent year. Set-off implies that the tax is exigible and the assessee wants to adjust the loss against profits to reduce the tax demand. That if such set-off is not permissible or possible owing to the income or profit of the subsequent year being fro .....

income from other type of source falling under any head. Restrictions, which the legislatures wanted to place on set-off or carry forward and set-off have been specifically provided by way of specific provisions in the Act. Therefore, unless there is a specific prohibition for set off or carry forward and set off in future, loss will have to be computed and it can be set-off in the same year or can be carried forward and set off in future. There is purpose of computing loss on transfer of Units .....

ed the same. Now suppose an assessee suffers loss of profit on sale of Units, he can claim the loss to be set off against his other capital gains, and can also seek carry forward and set-off in future. This is so because: (a) The head capital gains , is not an exempted head of income, (b) There is no specific bar on set off or carry forward of such loss, and (c) The expression any income arising , as used in section 10(34) covers only positive income and loss is not covered by the same. (d) Ther .....

read with section 139(1). Two decisions of ITAT In Vipul A. Shah v. ACIT 2011 (4) TMI 721 - ITAT MUMBAI the facts were as follows: The taxpayer was engaged in investment. During the assessment year 2004-05, the taxpayer had set off the indexed long term capital loss against non-indexed long term capital gains. The Assessing Officer did not allow the set off of indexed long term capital loss against non-indexed long term capital gains. Issue for consideration by the Tribunal was - Whether the in .....

al observed that the above provisions relating to set off of long term capital loss against the long term capital gains existed much prior to the mode of computation of capital gain without applying the benefit of indexation. A plain reading of the provisions of section 70(3) of the Act shows that the first part of the provision refers to a loss as computed under section 48 to 55 of the Income-tax Act in respect of any capital asset. The second part of the provisions of section 70(3) of the ITA .....

ains. The Tribunal accordingly held that indexed long term capital loss can be set off against non-indexed long term capital gains. Authors point of view: Computation of capital gain is to be made separately for each capital asset (or batch of capital asset bought at the same time and sold at the same time). For example suppose assets a,b,c,d, and e were bought on same day and sold on the same day then computation can be made at on go, though preferably computation should be separate because ass .....

ompute capital gains / loss after indexation. Suppose in some transactions there is loss after considering indexation, such loss shall be kept apart for set off and/or carry forward. The transactions which have resulted into LTCG even after applying CII, can only be considered u/s 112 and assessee can pay tax at prescribed rate on capital gains computed without applying CII. Suppose assessee has loss after indexation in some other transactions, such loss can be set off against income before inde .....

June 2015 the issue arose against disallowance of claim of set off of Long term Capital Loss on sale of shares - Security Transaction Tax ( STT ) was deducted against the Long Term Capital Gain arising on sale of land at Chennai- Held that:- section 10(38) excludes in expressed terms only the income arising from transfer of Long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of income from capital gains arising from transfer of shares. It do .....

the issue was decided in favour of assessee. The honourable Tribunal considered several judgments of the Supreme court and High Courts and came to conclusion that exemption u/s 10 was exemption from inclusion of income in taxable income, subject to fulfilment of various conditions. The head or source of capital gains was not exempted source. The expression income will not be extended to loss in such a case. Therefore, the loss on sale of shares / units was allowed to be set off against capital g .....

(3) for A.Y. 2007-08 and against order dated 12.01.2010 in relation to the penalty proceedings u/s. 271(1)(c) for the assessment year 2007-08. 2. We will first take up the quantum appeal in ITA No. 3317/Mum/2009, vide which, following grounds have been raised. 1.1 On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) - Central II, Mumbai [ the CIT(A) ] erred in confirming the action of Deputy Commissioner of Income Tax (the A.O) by not allowing t .....

ndry. The assessee in the computation of income had shown Long term capital loss on sale of shares amounting to ₹ 57,32,835/- and loss on sale of mutual funds units amounting to ₹ 2,61,655/-. The said Long term capital loss has been set off against the Long term capital gains of ₹ 94,12,00,000/- arising from sale of land at Chennai. The Assessing Officer held that the losses claimed cannot be allowed since the income from Long term capital gain on sale of shares and mutual fund .....

of income or loss and such exempt species of income or loss cannot be set off against the taxable species of income or loss. Tax exempt losses cannot be deducted from taxable income and, therefore, the Assessing Officer has rightly disallowed the claim of losses from shares to be set off against the Long term capital gain from sale of land. 5. Before us the learned senior counsel, Shri Soli Dastur, submitted that what is contemplated in section 10(38) is exemption of positive income and losses w .....

). Capital gain is chargeable on transfer of a capital asset u/s. 45 and mode of computation has been elaborated in section 48. Certain exceptions have been provided in section 47 to those transactions which are not regarded as transfer. Nothing has been mentioned in sections 45 to 48 that capital gain or loss on sale of shares are to be excluded as section 10(38) exempts the income arising from the transfer of long term capital asset being an equity share or unit. Legislature has given exemptio .....

ses and pigs which are exempt u/s. 10(27) whether can be set off against its income of other source under the head business . The Hon ble High Court after considering the relevant provisions of section 10(27) and section 70, held that section 10(27) excludes in expressed terms only any income derived from business of livestock breeding, poultry or dairy farming. It does not exclude the business of livestock breeding, poultry or dairy farming from the operation of the Act. The losses suffered by .....

n. Thus, he submitted that the losses on account of sale of shares should be allowed to be set off against Long term capital gain on sale of land. In his fairness, he also pointed out before us that there is a decision of Hon ble Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani vs. Asst. CIT (2014) 367 ITR 261 (Guj), which has decided this issue against the assessee. However, he submitted that in the said decision, the decision of Hon ble Calcutta High Court has not been referred .....

y relied upon the order of the AO and CIT(A) and submitted that, firstly, if the income from the Long term capital gain on sale of shares is exempt, then the loss from such sale of shares will also not form part of the total income and therefore, there is no question of set off against other income or Long term capital gain on different capital asset. Secondly, the decisions of Hon ble Gujarat High Court and ITAT Mumbai Tribunal should be followed. He further submitted that it is quite a settled .....

of land or not, as the income from Long term capital gain on sale of such shares are exempt u/s. 10(38). The nature of income here in this case is from sale of Long term capital asset, which are equity shares in a company and unit of an equity oriented fund which is chargeable to STT. First of all, Long term capital gain has been defined under section 2(39A), as capital gains arising from transfer of a Long term capital asset. Section 2(14) defines Capital asset and various exceptions and exclu .....

ion 71 provides for set off of loss in respect of capital gain. 8. From the conjoint reading and plain understanding of all these sections it can be seen that, firstly, shares in the company are treated as capital asset and no exception has been carved out in section 2(14), for excluding the equity shares and unit of equity oriented funds that they are not treated as capital asset. Secondly, any gains arising from transfer of Long term capital asset is treated as capital gain which is chargeable .....

off of capital gain. Nowhere, any exception has been made/ carved out with regard to Long term capital gain arising on sale of equity shares. The whole genre of income under the head capital gain on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as not to be included while computing the total income then in such a case, the profit or loss resulting from such a source do not enter into the computation at all. However, if a part of t .....

transfer of Long term equity shares and equity oriented fund and not only that, there are certain conditions stipulated for exempting such income i.e. payment of security transaction tax and whether the transaction on sale of such equity share or unit is entered into on or after the date on which chapter VII of Finance (No.2) Act 2004 comes into force. If such conditions are not fulfilled then exemption is not given. Thus, the income contemplated in section 10(38) is only a part of the source of .....

hares where STT is not paid, then gain or profit from such shares are taxable. Section 10 provides that certain income are not to be included while computing the total income of the assessee and in such a case the profit or loss resulting from such a source of income do not enter into computation at all. However, a distinction has been drawn where the entire source of income is exempt or only a part of source is exempt. Here it needs to be seen whether section 10(38) is source of income which do .....

ld be removed from the taxable income as the same is exempt u/s 10(38). This precise issue had come up for consideration before the Hon ble Calcutta High Court in Royal Turf Club, wherein the Hon ble High Court observed that under the Income tax Act 1961 there are certain incomes which do not enter into the computation of the total income at all. In computing the total income of a resident assessee, certain incomes are not included under s.10 of the Act. It depends on the particular case; where .....

t, 1961, was the assessee entitled to set off the loss on the two heads, namely, Broodmares Account and the Pig Account, against its income of other sources under the head Business Their Lordships after analysing the provisions of section 70 and section 10(27) observed in the following manner: In this case it is important to bear in mind that set-off is being claimed under Section 70 of the 1961 Act which permits set off of any income falling under any head of income other than the capital gain .....

essee wanted these losses to be set off. The Revenue contends that as the sources of the income are not to be included in view of the provisions of Clause (27) of s. 10 of the 1961 Act, the loss suffered from this source could also not merit the exclusion. Under the I.T. Act, there are certain incomes which do not enter into the computation of the total income at all. In this connection we have to bear in mind the scheme of the charging section which provides that the incomes shall be charged an .....

rce it is derived. In computing the total income, certain incomes are not included under s. 10 of the Act. It depends on the particular case where certain income, in respect of which the Act is made inapplicable to the scheme of the Act, and in such a case, the profit and loss resulting from such a source do not enter into the computation at all. But there are other sources which for certain economic reasons are not included or excluded by the will of the Legislature. In such a case we must look .....

case of Karamchand Premchand (supra), the Hon ble High Court came to the following conclusion: cl.(27) of s.10 excludes in express terms only any income derived from a business of live-stock breeding or poultry or dairy farming. It does not exclude the business of livestock breeding or poultry or dairy farming from the operation of the Act. Therefore, the losses suffered by the assessee in the broodmares account and in the pig account were admissible deductions in computing its total income Thus .....

, opined that, if loss was from the source or head of income not liable to tax or congenitally exempt from income tax, neither the assessee was required to show the same in the return nor was the Assessing Officer under any obligation to compute or assess it much less for the purpose of carry forward. Further, the Hon ble Supreme Court observed that From the charging provisions of the Act, it is discernible that the words ' income ' or ' profits and gains' should be understood as .....

as only one tax, on the 'total income ' of the assessee as defined in Section 2(15). An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the ' total amount of income, profits and gains referred to in Section 4(1)'. Secondly, it must be 'computed in the manner laid down in the Act'. If either of these conditions fails, the income will not be a part of the total income that can be brought to charge. While .....

he loss against profit to reduce the tax demand. It follows that if such setoff is not permissible or possible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing the loss to be carried forward . Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year from a taxable source. The ratio and the prin .....

e return and Assessing Officer also need not assess it. This distinction has to be kept in mind. Hon ble Calcutta High Court in Royal Turf Club have discussed the aforesaid decision of the Hon ble Supreme Court and held that the same will not apply in such cases. Thus, in our conclusion, we hold that section 10(38) excludes in expressed terms only the income arising from transfer of Long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of inco .....